Beijing’s Real-Estate Ambivalence

After last week’s moves from the Chinese government to clamp down on rampant property speculation that has sharply driven up prices, it might look as if Beijing is taking a tougher attitude toward the country’s real-estate market. But this is one subject area where Beijing is notoriously ambivalent.

After a State Council meeting chaired by Premier Wen Jiabao last Monday, China vowed to halt the “overly fast” rises in property prices by boosting the supply of cheap public housing and redeveloping slum areas. A few days later, five government agencies, including the central bank and the Finance Ministry, announced a series of tighter land-sale regulations for developers that included a minimum down payment of 50% on land purchases from the government.

This is the first time Beijing has set a nationwide down-payment requirement on land purchases from the state; local governments have typically asked developers to put down around 20%-30% of the value of the land in such deals in recent years. The new policy also requires developers to completely pay off land purchases from the government within one year of a sale agreement under most circumstances, with a one-year extension allowed for certain “special projects.”

The tougher stance on the sector has triggered a selloff in Chinese property stocks and dragged down the Shanghai Composite Index in the past few sessions. However, it remains to be seen how effective the measures will be in lowering housing prices from near-ridiculous levels.

Like many things in China, the devil is in the details.

For one, the harsher down-payment requirement will likely at best lead to the closure of a number of small- to medium-sized property developers that have weaker backing from the government, read: state-owned banks. But as long as the big and state-owned developers have access to easy credit, China is likely to continue to chalk up record results at land auctions, as seen earlier this year in an ironic backdrop to weak global economic conditions.

Meanwhile, there are absolutely no incentives for any local governments to give up high land prices, one of their biggest sources of income.

As for supplying more cheap public housing, it isn’t the first time Beijing has pledged this and it probably won’t be the last time: China had invested a total of 39.49 billion yuan in public housing as of the end of August, just 23.6% of the target set by the central government.

Many observers have wondered why Beijing can’t emulate Singapore’s success in providing nearly 90% of its population with government-subsidized housing. Beijing has never come up with a clear answer. Instead, China seems to even take pride in the fact that it boasts one of the world’s most commercialized and market-oriented property sectors, despite the tremendous public backlash the policy has provoked.

The most frequently-used excuse by the government itself is that the housing industry poses a serious dilemma: It’s a powerful economic growth engine but at the same time a potential source of social instability.

Other factors, such as the deeply intertwined commercial interests between bureaucrats and businesses, also complicate the situation. Thus, Beijing’s resolve to clean up its property market is less a matter of what it can do than what it’s willing to do.

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